Nextel Communications Inc. is the scrawny kid who grew up to become a scrappy fighter.
"A couple of years ago, I think people said, 'These guys don't have a chance. They have a funky technology, a balance sheet that's a mess and competitors that are big,' " said Timothy M. Donahue, Nextel's president and chief executive.
The Reston mobile-phone company certainly had a rough start. Its founders cobbled together a network in the 1980s and 1990s out of walkie-talkie licenses bought from taxi-cab dispatch operators. Heavy debt brought the company months from bankruptcy in 1996. It relied on a technology made by a single supplier, and its chunky phones lacked the dazzle of competitors' increasingly smaller, sleeker phones.
Nextel is still the smallest of the six national wireless carriers, but it is the most profitable. Its customer loyalty ranks second only to that of giant Verizon Wireless. Nextel's 13.9 million customers pay more on average on their monthly bills, mostly because they are hooked on the company's unique "push-to-talk" walkie-talkie service. In addition, its focus on business customers makes Nextel a big threat to Verizon Wireless.
"I've never felt better about our position," Donahue said.
Over the past year, Nextel has dramatically ramped up its lobbying operation, outmaneuvering Verizon Wireless to win the rights from the Federal Communications Commission to valuable new cellular airwaves worth billions. Company representatives have been hobnobbing with politicians at both the Democratic and Republican national conventions, where Nextel supplied phones to convention staff and hosted promotional events and private receptions. The company also bought the rights to put its name on NASCAR's premium race series.
Its stock, which traded below $3 a share two years ago, rallied and has been trading in the $23-a-share range. It closed Friday at $23.29.
"It seems to me like they always have a chess board in mind, and they're always thinking a few steps ahead," said Rebecca Arbogast, an analyst with Legg Mason Wood Walker Inc., a major institutional shareholder in the company. "They've come from behind in an unorthodox way."
Albert Lin, an analyst with American Technology Research Inc., a San Francisco market research firm, agreed that the company has made a number of smart strategic moves but said it also may have problems continuing to grow at such a pace. He said the company's income tax rate is expected to go from less than 5 percent to as much as 39 percent starting in the third quarter of this year because the company is profitable and has reduced its cache of write-offs.
The company also is mulling what analysts estimate could be a $1 billion to $2 billion overhaul of its network using a novel technology that could make Nextel a big player among the pack of companies offering wireless, high-speed Internet. It is an expensive risk. "The transition to broadband is particularly tricky for Nextel because of having to transition to new spectrum" at the same time the company is changing technologies, said Scott Cleland, chief executive of Precursor, a Washington research group. "There are many more points of potential failure than their competitors."
Nextel's cultural roots are in its unusual upbringing. The company was founded as Fleet Call Inc. by Morgan E. O'Brien and Brian McAuley in 1987. The technology Nextel uses isn't like any other -- it is patented by Motorola Inc., which also makes nearly all its phones. And its single biggest selling point has always been one feature -- a walkie-talkie radio on every phone that allows users to talk on a speaker phone without dialing a number. Although the walkie-talkie has been ridiculed by competitors, the company has developed loyal business customers because its speaker phone is convenient and conversations can be heard over traffic or construction equipment.
At Nextel, differences from other companies are fiercely embraced. "I think of them as the red-headed stepchild" with a chip on its shoulder, said one lobbyist close to Nextel. Because it is the only major wireless carrier not backed by a telecommunications giant, Nextel executives fear other wireless companies are out to get them, the source said.
But fostering healthy paranoia is a strategy, said John Chapple, chief executive of Nextel Partners Inc., the affiliate company that sells the Nextel brand in smaller markets. "We're rallying the people to slay the giant," he said. "I've said in meetings with our folks, 'Those people are trying to steal the food out of your kids' mouths.' "
Nextel displayed its ferocity a year ago, when Verizon Wireless launched its copy-cat walkie-talkie service. "Their response to Verizon's push-to-talk was vicious," said Patrick Comack, a telecom analyst with Variant Research, an independent research firm. Verizon Wireless's service had a several-second delay, which Nextel mocked in print ads as "push-to-wait." Verizon Wireless eventually pulled marketing for its version of the service.
Early in Nextel's history, cellular investor Craig O. McCaw and his family put $1.1 billion into the company and infused it with a fighting spirit by bringing in "guys who knew how to compete," said William E. Kennard, former FCC chairman and a member of Nextel's board. Those fighters included Donahue and former Nextel chief executive Daniel F. Akerson.
That fighting spirit could be seen in Nextel's recent multimillion-dollar lobbying battle with Verizon Wireless before the FCC. Nextel pushed for valuable new airwaves in exchange for agreeing to pay to revamp systems and reduce cellular interference with public-safety radios. Verizon Wireless fought Nextel's plan but lost, in what FCC Chairman Michael K. Powell later called the most ruthless lobbying battles in his seven years at the commission.
"You still get the sense that we're the new kid on the block, and we have to fight for existence," Kennard said.
But fanning the fighting spirit and responding quickly to challenges gets tougher for a company with $10.8 billion in annual sales and 17,000 employees. "The challenge at Nextel as we get larger and more established is not to lose that culture," Kennard said.
Nextel executives and directors say they reach down into the organization's lower rungs for ideas to keep the business nimble. After hearing a rumor about malfunctioning software, Donahue bypassed high-ranking managers to talk with engineers about a fix. Another time, after a salesperson told Chief Operating Officer Thomas Kelly Jr. about an idea for an advertising campaign directed at government workers, Kelly set up a meeting between the salesperson and the advertising team, resulting in a set of forthcoming ads. Nextel's directors are encouraged to roam the company and listen to employees' ideas and peeves.
Rather than try to mimic its larger competitors, Nextel focused on polishing and promoting its own unique product -- its walkie-talkie. "There is a whole ecosystem around it," everything from marketing to design, said Atish Gude, vice president of strategic planning for Nextel.
Initially, Nextel pitched the walkie-talkie to a core group of blue-collar users: manufacturers, construction workers, taxi drivers. Over time, it pushed the product to their customers' vendors and suppliers who also wanted to be able to hook into that network.
Nextel then divided the country into 72 separate markets, running local studies on everything from its brand image to the performance of its distribution and sales channels, Gude said. Nextel then designed strategies for each market to tap new segments of cell-phone users, such as lawyers, doctors and government and public-safety workers. Now the company is targeting its users' spouses, as well as teenagers.
Detailed market research is common among telecommunications companies, which spend a lot to understand who their customers are, said Lin of American Technology Research. But, Lin said, Nextel and Verizon Wireless have made particularly effective use of that information.
Challenges With Motorola
Sticking with a unique technology hasn't always been easy for Nextel. Unlike other carriers that have options to buy from multiple vendors, Nextel relied on its exclusive relationship with Motorola -- a marriage that has proved fruitful and difficult for both companies.
"Motorola was both the best part of my job and the worst," said one former Nextel executive. As its largest customer, Nextel got special treatment from Motorola, he said. But Nextel was frustrated that Motorola continued to make bulky, unattractive phones for Nextel, long after the rest of the industry was developing sleek, thin phones, he said.
Edward J. Zander, who joined Motorola as chief executive in January, acknowledged the relationship's rockiness. Zander said the first thing he did upon accepting the job was to call Donahue.
Zander said the companies were at odds because their technologists and executives weren't talking about plans three and five years down the road. Now he e-mails or calls Donahue every couple of weeks, and the companies are jointly developing the next generation of proprietary wireless technology and more advanced phones.
Meanwhile, new vendors have discovered that winning business from Nextel isn't easy.
Flarion Technologies Inc. was a 70-person lab operation without a product for sale when Barry West, Nextel's chief technical officer, came knocking on its door three and a half years ago.
Flarion installed at Nextel's headquarters "an army of people" that put Flarion's high-speed wireless Internet technology through a battery of tests to comply with a long list of Nextel demands, said Michael Gallagher, president of the New Jersey-based company. Although it's in the middle of a promising market trial in Raleigh, N.C., paid for by Nextel, Flarion still has no major contract.
Nextel puts every technology vendor it is testing through three major phases of evaluation, Gallagher said, starting with testing the technology in the lab, testing in the field and conducting market tests to gauge cost, marketability and demand.
During one test, Nextel hooked up Flarion's hardware and software to six of its cell towers and tried to crash the system. "They wanted to know if they could break it, and that alone took thousands and thousands of man-hours of testing," Gallagher said. In the end, Nextel's engineers weren't able to break it.
"I just don't know of any other carrier that tests as thoroughly," said Gallagher, who added that Flarion has dealt with many carriers around the world. Flarion had to improve its internal processes to deal with the testing, he said. "They make us sweat every day. It's constant."
Tests and market studies are a way of life at Nextel, said Robin Boniface, vice president of sales operations.
On May 1, 2001, Nextel closed on a deal to buy its first retail stores from Let's Talk Cellular & Wireless Inc. For two months beforehand, Nextel planned how to switch displays, signs, brochures and billing and sales processes so that when the 203 stores opened as Nextel shops May 2, everything was standardized.
"It's sort of like a think tank at Nextel," Boniface said. The company researches every piece of data it needs to know before taking action.
At times, Nextel has taken flack for being slow to market with such offerings as high-speed services. While other cellular phone companies are starting to unveil such features as wireless video services, Nextel is still a year or two away from having a network that can carry such speeds.
NASCAR Naming Rights
Company executives point to moments when they have moved quickly, such as the sponsorship of NASCAR. At a chance meeting at the 2003 Super Bowl, NASCAR marketing executive Brian Corcoran mentioned to Nextel's senior director of sports and entertainment marketing, Michael Robichaud, that RJ Reynolds Tobacco Co., the sponsor of what had long been the Winston Cup NASCAR races, was considering selling the naming rights.
Over several weeks, Nextel studied the demographics of NASCAR's expanding base of 128 million fans. Its followers overlapped with Nextel's base -- automotive and transportation workers, salespeople and frequent travelers who rely heavily on their cell phones, said Mark Schweitzer, senior vice president of marketing. Before the sponsorship officially went up for sale, Nextel started negotiations with NASCAR.
Last year on May 10, Schweitzer, Donahue and Kelly dined with top NASCAR executives. Two and a half weeks later, they signed the biggest sports-marketing deal in the United States, according to sports-marketing research firm TNS Sport. The deal is reported to be worth $700 million to $750 million over 10 years, although Nextel has declined to confirm the price tag. Its bid beat out such companies as McDonald's Corp., Coca-Cola Co., and Anheuser-Busch Cos.
"That's when you just roll the dice and say, 'This is going to be good for the company,' " Donahue said.
Looking ahead, analysts say, the challenge for the entire wireless industry is to manage the transition to higher-speed networks. It is a massive investment essential to their survival, as customers use wireless communications for e-mail, Web browsing and other tasks. But it is one that could eat into profits.
Nextel is in the process of collecting market data from its Flarion trial in Raleigh to study customer response to everything from pricing to the color, form and function of the devices -- in other words, to build an ecosystem similar to the one Nextel built around its walkie-talkie, Donahue said.
By the end of the year or early next year, the company will decide whether it will go with Flarion or another technology to upgrade its network to offer its customers a broadband service, he said.
"But we're approaching it," Donahue said, "in our usual, thorough, factual and disciplined way."